Approximate Equilibrium Asset Prices
AbstractThis paper reconsiders the determination of asset returns in a model with Kreps-Porteus generalized isoelastic preferences where returns appear governed on the basis of Euler equations, by a combination of the two most common measures of risk -- covariance with the market return and covariance with consumption. To go beyond Euler equations and to take into account the links that the consumers' optimal behavior establishes, through a budge connstraint, between market returns and consumption, we derive an approximate consumption function (obtained, as in Campbell (1994), by log-linear approximation). Arguing that total consumer wealth is unobservable, we use this consumption function to reconstruct from observed consumption data i) the wealth that supports the agents' consumption optimal income, and ii) the rate of retun on the consumers' wealth portfolio. This procedure enables us to derive formulas that (approximately) price, in the tradition of Lucas (1978), all assets as a function of their payoffs and of consumption. The generalized consumption CAPM that we obtain is derived for both homoskedastic and heteroskedastic consumption processes. We also use our approximate pricing kernel to highlight the crucial role of temporal risk aversion in the determination of the equilibrium term structure of real interest rates.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Sciences Po in its series Sciences Po publications with number 6611.
Date of creation: Jun 1998
Date of revision:
Find related papers by JEL classification:
- E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
- G0 - Financial Economics - - General
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Jason Beeler & John Y. Campbell, 2009.
"The Long-Run Risks Model and Aggregate Asset Prices: An Empirical Assessment,"
NBER Working Papers
14788, National Bureau of Economic Research, Inc.
- Beeler, Jason & Campbell, John Y., 2012. "The Long-Run Risks Model and Aggregate Asset Prices: An Empirical Assessment," Critical Finance Review, now publishers, vol. 1(1), pages 141-182, January.
- Belén Nieto & Rosa Rodríguez, 2004. "Modelos De Valoracion De Activos Condicionales: Un Panorama Comparativo Con Datos Españoles," Documentos de Trabajo de EconomÃa de la Empresa db040202, Universidad Carlos III, Departamento de Economía de la Empresa.
- Lars Peter Hansen, 2007. "Beliefs, Doubts and Learning: Valuing Economic Risk," NBER Working Papers 12948, National Bureau of Economic Research, Inc.
- Sydney Ludvigson, 2008. "The Research Agenda: Sydney Ludvigson on Empirical Evaluation of Economic Theories of Risk Premia," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 9(2), April.
- Santiago García Verdú, 2010. "Equilibrium yield curves under regime switching," Working Papers 2010-08, Banco de México.
- John Y. Campbell & Robert J. Shiller & Luis M. Viceira, 2009.
"Understanding Inflation-Indexed Bond Markets,"
Cowles Foundation Discussion Papers
1696, Cowles Foundation for Research in Economics, Yale University.
- John Campbell & Robert Shiller & Luis Viceira, 2009. "Understanding Inflation-Indexed Bond Markets," Yale School of Management Working Papers amz2587, Yale School of Management.
- John Y. Campbell & Robert J. Shiller & Luis M. Viceira, 2009. "Understanding Inflation-Indexed Bond Markets," NBER Working Papers 15014, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Spire @ Sciences Po Library).
If references are entirely missing, you can add them using this form.